INDIA Media BUY Target Price: Rs95 CMP: Rs51 Upside: 86% *as on 19 April 2012 Ankit Kedia ankit.kedia@centrum.co.in +91 22 4215 9634 PrimeFocusInitiation 20 April 2012 3-D to propel growth PrimeFocus is a market leader in 2D to 3D conversion and has created a mark globally by working on 10 of the top 30 worldwide blockbusters in the past 3 years. Its global world sourcing model from its 15 facilities, 4,500+ people, 24x7, 365-day work schedule makes it a strategic partner to global studios. Favourable industry trends along with strong management team give us confidence on 30.7% revenue CAGR over FY11-14E. Initiate coverage with a BUY on the stock with an upside of 86%. Unique global network of integrated studios: PrimeFocus has offices across 3 continents in all time zones. Its 15 facilities, over 4,500 staff, 24x7, 365-day work schedule give it major time and cost benefits. This unique platform offers all services under one roof – right from pre-production to distribution for clients across the film, broadcast and commercials space worldwide. Well-positioned to capitalize on its 3D and VFX capabilities: The increasing use of visual effects (VFX) and 3D in movies opens huge market potential for PrimeFocus. It has built a ‘state-of-theart’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It is the first company worldwide to successfully complete an entire movie, Clash of the Titans from 2D to 3D in a record 8 weeks simultaneously across 7 facilities worldwide. Technological leadership makes it strategic partner for content owners: Given its highly differentiated offering and high execution track record the company has been able to garner some of the most important projects from studios. It is focusing on widening and deepening studio partnerships across 2D to 3D conversion and VFX along with making the relationships global. Its customers include Hollywood studios such as Warner Bros., Lucasfilm, DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment, Relativity Media and Sony. Strong visibility on financials: We expect revenues to grow at a CAGR of 30.7% to Rs11.2bn over FY11-14E on the back of strong growth in 2D-to-3D conversion. Operating margins are set to expand from 29.6% in FY12E to 33.6% in FY14E on the back of increase in outsourcing to India. Profitability of the company will grow at a CAGR of 28.7% to Rs1771mn over FY11-14E led by strong topline growth and margin expansion. Valuations: The stock is currently trading at 5.7x and 4.2x FY13E and FY14E EPS of Rs8.76 and Rs11.89 respectively. PrimeFocus trades at a significant discount to its Indian M&E peers even though it has higher revenue growth, high RoE, higher margins and leadership in domestic operations along with strong global presence. We value PrimeFocus at 8x FY14E EPS of Rs11.89 and arrive at a target price of Rs95, 86% upside from current levels. Key Risks: i) Sharp fall in pricing for 2D to 3D conversion due to increase in competition; ii) Sharp currency movements that could impact profitability considering that major revenue is from UK and North America; iii) Outstanding FCCB of USD55mn which it is expected to re-pay before December 2012 with 43% premium amounting to a total of ~USD79mn. Key Data Bloomberg Code PRFO.BO Reuters Code PRIF IN Current Shares O/S (mn) 138.9 Diluted Shares O/S(mn) 138.9 Mkt Cap (Rsbn/USDmn) 7.1/137 52 Wk H / L (Rs) 78/33 Daily Vol. (3M NSE Avg.) 523,139 Face Value (Rs) 1 USD = Rs52.0 Shareholding Pattern Others 34.5% DII 1.7% FII 14.1% as on 31 December 2011 Promoter 49.7% One Year Indexed Stock Performance 150 140 130 120 110 100 90 80 70 60 50 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 PRIME FOCUS LTD Price Performance (%)* NSE S&P CNX NIFTY INDEX 1M 6M 1Yr PRIF 10.3 (7.8) (21.6) NIFTY 1.1 4.7 (8.9) *as on 19 April 2012 Source: Bloomberg, Centrum Research Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) FY10 4,528 27.8 1,196 26.4 472 501.8 3.2 25.6 8.8 15.8 9.9 FY11 5,030 11.1 1,681 33.4 831 76.2 5.6 29.8 13.5 9.0 7.0 FY12E 7,781 54.7 2,305 29.6 989 19.1 6.6 23.9 13.0 7.5 5.3 FY13E 9,366 20.4 2,936 31.4 1,304 31.8 8.8 27.3 16.3 5.7 4.3 FY14E 11,223 19.8 3,768 33.6 1,771 35.8 11.9 30.6 20.6 4.2 3.0 Source: Company, Centrum Research Estimates Please refer to important disclosures/disclaimers inside Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet